Tuesday, May 19, 2009

Once again the Federal Trade Commission has issued yet another warning to the public about creative real estate foreclosure rescue scams.

I am asking EVERYONE who is thinking about purchasing ANY creative "get-rich-quick" real estate course to compare what the author is teaching against the warnings of the FTC and other law enforcement agencies.

Most creative real estate courses you see advertised are merely foreclosure rescue scams. The author isn't teaching you how to BUY real estate at discount prices. He or she is teaching you how to STEAL it from innocent and desperate people, often elderly, unemployed, or sick.

The FTC language could not be clearer.

How the Scams Work

Foreclosure rescue firms use a variety of tactics to find homeowners in distress: Some sift through public foreclosure notices in newspapers and on the Internet or through public files at local government offices, and then send personalized letters to homeowners. Others take a broader approach through ads on the Internet, on television, or in the newspaper, posters on telephone poles, median strips and at bus stops, or flyers or business cards at your front door. The scam artists use simple and straight-forward messages, like:

“Stop Foreclosure Now!”

“We guarantee to stop your foreclosure.”

“Keep Your Home. We know your home is scheduled to be sold. No Problem!”

“We have special relationships within many banks that can speed up case approvals.”

“We Can Save Your Home. Guaranteed. Free Consultation”

“We stop foreclosures everyday. Our team of professionals can stop yours this week!”

Once they have your attention, they use a variety of tactics to get your money:

Phony Counseling or Phantom Help

The scam artist tells you that he can negotiate a deal with your lender to save your house if you pay a fee first. You may be told not to contact your lender, lawyer, or credit counselor, and to let the scam artist handle all the details. Once you pay the fee, the scam artist takes off with your money.

Sometimes, the scam artist insists that you make all mortgage payments directly to him while he negotiates with the lender. In this instance, the scammer may collect a few months of payments before disappearing.

Bait-and-Switch

You think you’re signing documents for a new loan to make your existing mortgage current. This is a trick: you’ve signed documents that surrender the title of your house to the scam artist in exchange for a “rescue” loan.

Rent-to-Buy Scheme

You’re told to surrender the title as part of a deal that allows you to remain in your home as a renter, and to buy it back during the next few years. (Emphasis added by me.) You may be told that surrendering the title will permit a borrower with a better credit rating to secure new financing – and prevent the loss of the home. But the terms of these deals usually are so burdensome that buying back your home becomes impossible. You lose the home, and the scam artist walks off with all or most of your home’s equity. Worse yet, when the new borrower defaults on the loan, you’re evicted.

In a variation, the scam artist raises the rent over time to the point that the former homeowner can’t afford it. After missing several rent payments, the renter – the former homeowner – is evicted, leaving the “rescuer” free to sell the house.

In a similar equity-skimming situation, the scam artist offers to find a buyer for your home, but only if you sign over the deed and move out. The scam artist promises to pay you a portion of the profit when the home sells. Once you transfer the deed, the scam artist simply rents out the home and pockets the proceeds while your lender proceeds with the foreclosure. In the end, you lose your home – and you’re still responsible for the unpaid mortgage. That’s because transferring the deed does nothing to transfer your mortgage obligation.

Fraudulent foreclosure “rescue” professionals use half truths and outright lies to sell services that promise relief and then fail to deliver.

NEVER EVER sign away the deed to your home to ANYONE without them eliminating the existing mortgage on the property. This is a classic fraud technique at it is common in nearly all the creative real estate courses being sold today.

Creative real estate was born in the 1970s during a period of high interest rates and tight money. These techniques were taught to real estate brokers and sales agents to put together sales that otherwise would not happen. With the success of author Robert Allen's book NOTHING DOWN an army of creative real estate gurus entered the scene with each trying to outdo each other as to how easy and how fast a fortune can be made in real estate without cash or credit.

Creative real estate has degenerated these days into little more than a criminal enterprise where overpriced and mostly worthless courses are sold at hugely inflated prices. More real estate fraud is taught than legitimate real estate investing technique.

There are MANY honest and legitimate real estate authors out there. These authors make it clear that real estate investing is not a get-rich-quick endeavor but a hard business where 80% of investors lose money. These authors give ethical advice and don't talk about playing "games" like "hide and go seek" with lenders, insurance companies, and sellers.

I will have much more on creative real estate and the gurus who sell these products in the days ahead. They are frauds and, most importantly, they know I know they are.

Um, excuse me but any score under FIFTY on the NAHB sentiment index implies more builders than not believe conditions are POOR. A rise from 14 to 16 points is not just statistically insignificant, it implies conditions are truly bad. Spring is the ideal buying season for homebuilders and the index is stuck below 20???

But check out CNN's headline on this article. BEST CONDITIONS IN A LIFETIME. For what? Building a home? There is so much excess inventory in most cities a sponge the size of the moon would not soak up all the surplus housing. Best time to buy a home? REALLY? With prices of housing still falling, tight mortgage money, and rising unemployment I don't think so.

The media needs to stop cheerleading markets and accurately report the news. Their job is not to make us feel better about the world but accurately describe it. The financial press is pretty good at what they do. The mainstream press, on the other hand, is often a joke when reporting on economic and financial matters. They seem to say what they believe we want to hear rather than what really needs to be said.

Speak to homebuilders like I do every single day. Their businesses are struggling. Excess inventory is choking them. Credit crunch issues abound. The Obama first-time homeowner tax credit is not drawing NEW buyers into their model homes, just the same buyers who would be looking for a home anyway. Profit margins are still falling---the key indicator to their business success.

Invest on the facts, the statistics you can see with your own eyes. Get investment ideas from the media but understand most of what they say is either biased, half-wrong, or just plain silly.

Friday, May 15, 2009

Warren Buffett's investment vehicle Berkshire Hathaway added very few equity positions in the first quarter of 2009 in documents released to the SEC. Mostly he added to what he already had in JNJ, WFC, and his railroad holdings and sold some money losers including a big loss in COP.

The big question is WHY? Didn't stock prices fall fast and far enough for him to pick up some real bargains?

The speculation is that he sees value in the bond markets. Perhaps this is true. I see nice valuations there too, especially in lower graded bonds. Forget the Treasuries and AAAs.

But I think the real reason Warren skipped on the equity markets is simple. He didn't have the cash to make large stock purchases. His celebrated $50 billion cash cushion was gone. The best evidence of this was his decision to sell JNJ and PG stock earlier this year. These are core BRK holdings, the very types of companies Warren loves to own.

I think Warren was being conservative after large investments in GE and GS and thought "Why not keep $10 billion in the bank for emergencies?" After all, BRK is an insurance company and not a private piggy bank for Charlie and Warren.

I'm a huge fan of Warren Buffett and a long time BRK shareholder. I think much can be learned from what Warren does---and in this case what Warren doesn't do.

Wednesday, May 13, 2009

I have been studying the life of Judge Thomas Mellon recently. He was the founder of the massive Mellon fortune and a hugely successful real estate investor.

In his autobiography he discusses the powerful influence the autobiography of Benjamin Franklin had on him as a child. The impact of this book on Thomas Mellon was so profound that for nearly one hundred years there was a full scale statute of Franklin at the entrance to the Mellon bank in Pittsburgh.

So I read Franklin's book and other of his Poor Richard writings. I was curious to see what the fuss was all about.

I was floored. What genius! We all know Benjamin Franklin was a founding father of the United States, a diplomat, scientist, inventor, and all the rest but who knew what a successful motivational speaker and personal finance writer he must have been in the day.

His autobiography, written in 1771, is simply fascinating to read.

His essay, "The Way to Wealth" written between 1757 and 1758 is a magnificent account on how to build a personal fortune. The language is almost Biblical like prose, filled with his usual assortment of rhymes and other folksy type advice.

Many of his suggestions in this essay are already part of our culture, for example:

"Early to Bed, Early to Rise, Makes a Man Healthy, Wealthy, and Wise."

But this text is so dense with such axioms it is impossible to read a paragraph without stumbling over ten of them with each giving you pause to think.

Some examples:

"He who lives upon hope will die fasting."

"Drive thy business, let not that drive thee."

"The sleeping Fox catches no poultry and there will be sleeping enough in the grave."

"A Ploughmen on his Legs is higher than a Gentlemen on his knees."

"The Borrower is a Slave to the Lender, and the Debtor to the Creditor."

I cannot recommend this book enough. Read it! Or as Franklin would say:

Tuesday, May 12, 2009

I am amazed at the sheer audacity the U.S. government is exercising in propping up the U.S. banking industry. If any private citizen or group tried the same thing it would be considered bank and securities fraud and the FBI with sirens screaming and guns at the ready would be involved.

But since it is the Fed, and the U.S. Treasury, and the Congress, and the Obama Administration that are manipulating bank stock prices, it's okay. The ends justify the means, right?

It's obvious the banks desperately need new capital to shore up their crippled balance sheets. So instead of letting the marketplace take its natural course and let the stronger institutions take over the dying ones, the very same practice that has brought us two hundred years of economic growth through multiple economic panics and depressions, the government decides to create a zombie industry of walking dead financial institutions held up with little more than public money and accounting gimmicks.

First, the Fed opens its window and buys hundreds of billions of dollars of mostly worthless mortgage paper. Let's not forget TARP, TARP II, TALF, and the alphabet soup of acronyms that have wasted TRILLIONS OF DOLLARS getting us here. The Feds balance sheet is now worse than any individual bank ever looked.

Second, the Treasury (through FASB) abandons the "marked-to-market" rule. Let the banks decide how much their assets are worth instead of the open market. Sort of like letting a sixteen year old boy who just discovered girls to set his own curfew.

Then, of course, comes the kibuki dance of the bank "stress tests" which give the Bernanke Stamp of Approval to bank shares, one of the dumbest ideas to come out of an institution which seems to breed them like rabbits in the springtime. Here is an excellent analysis on the stress tests and why they are not only meaningless but harmful.

What is the purpose behind all this? Simple. To get a rally in bank shares so they can sell more stock to the public. It's easier to get equity in the midst of a rally. When your shares are up investors want to buy more. The current bank stock rally has doubled, even tripled, the prices of some major bank shares. Guess what they are doing? Issuing stock? Good guess.

I urged people to short the financials in April 2008. I not only was right I made a nice chunk of change doing so. I see no fundamentals on the horizon that are going to lift bank or financial stocks higher EXCEPT for the manipulations of the U.S. government---and they can only prop up zombie banks for so long. Ask the Japanese and their experience with Dawn of the Dead bankers proping up 28 Days Later companies at taxpayer expense.

So what fundamentals am I looking at that keep bank shares down?

Banks hold HALF of the $3.5 TRILLION of commercial real estate paper outstanding and the nonperformance rate on this debt has increased 250% in the last quarter. Forget that 30-40% of this paper is underwater and worthless. BARRONS did a great piece on this problem in their May 4, 2009 issue's cover story.

"The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called an adverse economic situation." Read the rest of this article from the NYT and get an earful.

Sunday, May 10, 2009

I recently re-read one of my all-time favorite books, ATLAS SHRUGGED by Ayn Rand. I read this incredible novel about once every ten years or so since it formed the basis of her political ideology called objectivism. Each reading gives me a greater insight into what she was saying and boy was she right.

With all the recent economic events in turmoil around us I can only think of how Hank Reardon would react.

A U.S. President ordering the firing of the CEO of General Motors.

Half of Chrysler owned by the U.A.W.

The Fed ordering banks to shore up their balance sheets or face a government takeover.

Taxes rising on the rich, in other words, the productive, while being reduced to zero for the poor, in other words, the unproductive.

An official Federal economic policy that believes it is possible to grow the economy and make it competitive on the world stage by increasing regulation of business, deficit spending beyond all historic measures, raising taxes, devaluing the currency, and for the first time ever giving Federal officials voting rights in corporate boardrooms.

Ayn Rand, Russian born by the way, warned us about all this more than sixty years ago. She saw with her own eyes as a little girl from her bedroom window the rise of Bolshevism in St. Petersberg and all its consequences. Her father's pharmacy in the city was seized without compensation by the Communists. The family was forced to leave the city and on the way to the Crimea they were nearly all killed by roadside bandits.

Her father started a second new pharmacy in the Crimea. It took was confiscated by the Soviets.

He then began to work in yet another pharmacy. It too was "appropriated" by government officials. Ayn Rand wrote of these experiences as "a state policy where families were officially expected to work and starve."

She was purged by Soviet officials from her university for her political beliefs. As she fled Russia her most important political mentor and the subject of her first novel, WE THE LIVING, was arrested and executed. When she finally left Russia vowing never to return a friend told her to describe her homeland this way:

"If they ask you, in America, tell them that Russia is a huge cemetery and that we are all slowly dying."

That is how I feel in so many ways about my country. The great economic and political experiment that gave us centuries of unprecedented economic vitality and democratic freedom is slowly dying, strangled like an infant in a crib by a cabal of greedy bankers and the government bureaucrats they keep on their payroll. Lobbying for TARP largess has replaced entrepreneurism as a virtue. Who you know matters more than what you know---or what you can do. All money belongs to the state instead of who actually worked for it.

Read ATLAS SHRUGGED and also THE FOUNTAINHEAD to get a better grasp of what America once was, at least to the eyes of a Russian who saw the nightmare of a government out of control and bent on seizing every last drop of power for its own ends.

Then read THE WALL STREET JOURNAL to witness the sad display of corporate executives lining up like homeless men at a soup kitchen with bowls at the ready seeking money earned by the hard work and sweat of others.

Why attempt to develop land in an area where residents, many of them merely renters who don't own a single molecule of property, will fight you for years on the development? There are so many communities, counties, and countries around the world that welcome development there is no need to fight City Hall and the minions that rely upon government largess for a living.

In fact, the largest profits are made in areas that sponsor and promote development instead of fight it. This is more than common sense. It is empirical fact.

The Edge could develop land anywhere around the world and have local authorities tossing rose petals at his feet, begging for not only his cash but his reputation. Instead, he is being vilified for wanting to build a road and emitting CO2 while doing it.

I am going to make sure The Edge gets a copy of the new edition of INVESTING IN LAND when it goes on sale this fall. I'm a fan of his music and of his development ideas.

Tuesday, May 5, 2009

In testimony today before Congress Fed Chairman Ben Bernanke says the U.S. recession should begin easing in late 2009.

This, of course, is the same recession he denied was going to happen in 2008.

Want to read how truly inept and out of touch with reality Ben Bernanke really is? Read this speech he gave to the Chicago Fed on May 17, 2007 where he denies there is any coming problem in the U.S. subprime mortgage market.

His exact words here:

"As the problems in the subprime mortgage market have become manifest, we have seen some signs of self-correction in the market. Investors are scrutinizing subprime loans more carefully and, in turn, lenders have tightened underwriting standards. Credit spreads on new subprime securitizations have risen, and the volume of mortgage-backed securities issued indicates that subprime originations have slowed. But although the supply of credit to this market has been reduced--and probably appropriately so--credit has by no means evaporated. For example, even as purchases of securitized subprime mortgages for collateralized debt obligations--an important source of demand--have declined, increased purchases by investment banks, hedge funds, and other private pools of capital are beginning to fill the void. Some subprime originators have gone out of business as their lenders have cancelled credit lines, but others have been purchased by large financial institutions and remain in operation. Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits." (emphasis added by me)

Of course within six months the entire world banking system was brought to the brink of collapse by subprime paper but Bernanke never saw it coming.

I did---and wrote about it as early as 2004 but the Chairman of the Federal Reserve System with a staff of five hundred full-time professional economists missed it.I had been writing about how deteriorating underwriting standards in the mortgage market, excessive valuations on real properties, and unrealistic investor expectations hyped by Wall Street and creative real estate gurus were destroying the U.S. real estate market for YEARS before Bernanke took to the podium in 2007 but hey, he's a nice guy so let's pass on his faults.

Bernanke is CLUELESS when it comes to anything related to the U.S. economy. He literally has not been right on a single issue. I don't see any positive growth in the U.S. economy until at least late 2011 and negative returns for investors on most classes of real estate through 2012. And I see a tidal wave of inflation on the horizon that will swamp any short-term positive growth that manages to poke above the chaos Bernanke, Paulson, Cox, Geithner & Company have given us.

Want more on the incompetence of Ben Bernanke? Check out this great Jim Rogers video where he calls Bernanke "an idiot." I agree with Jim.